On February 23, 2016, the Ninth Circuit overturned the 2013 Oregon District Court decision allowing employers in Oregon (and other Ninth Circuit states where employers do not claim tip credits) to have tip pools which include employees who are not customarily tipped (the “back-of-the-house” employees like dishwashers and cooks). That 2013 decision invalidated U.S. Department of Labor (DOL) regulations prohibiting employers from collecting and redistributing tips among all employees, including non-tipped employees, even when the employer does not claim a tip credit under the Fair Labor Standards Act (FLSA). For a refresher on that decision and the background on tip-pooling regulations, please see our previous alert on the topic.

Several restaurant and lodging associations sued to invalidate the DOL’s rule expanding the FLSA restrictions on tip pooling to include employers who did not take a tip credit. The restaurant and lodging associations argued that, because the Act was silent on that point, the rule was contrary to Congress’s intent. The Ninth Circuit panel of judges disagreed.

The Ninth Circuit, in a split decision, concluded that the DOL was within its rights to expand the rule because the Act was silent on whether it applied to employers who did not take tip credits, and because the DOL’s interpretation was reasonable. Because the Oregon District Court granted summary judgment in favor of the restaurant and lodging associations, the case has been remanded back to the District Court for further proceedings consistent with the Ninth Circuit’s decision.

So what does this mean for employers who have tipped employees? The Ninth Circuit decision makes tip pools which include back-of-the-house employees invalid, even where employers are prohibited from taking tip credits (such as in Oregon). Employers with tip-pooling agreements should review and revise those agreements as soon as possible to remove employees who are not customarily tipped, and consult with employment counsel if questions remain. We will continue to monitor the District Court case on remand (or any appeal that stems from this Ninth Circuit decision).